Thursday, October 05, 2006

Neuroeconomics 2006, Book, Large-Cap Value, Real Estate, and China

Neuroeconomics 2006 (Salt Lake City)Many developments in the last few months. The Neuroeconomics 2006 conference showcased some of the latest decision making research. Financial practitioners again attended the conference, including Michael Maubboussin (Legg Mason and Columbia University) and Arnold Wood (Martingale Asset Management), additionally Jason Zweig from Money Magazine was present. His next book, due out in April 2007 ("Your Money and Your Brain"), promises to be a great read about the intersection of neuroscience and investing.

SooChow Gambling Task
Researchers in Taiwan developed a fascinating gambling task (Soochow gambling task) with counterintuitive results. Even when experimental subjects know that they have a choice between a positive and a negative expected value bet (+$250 versus -$250), they still choose the negative option in large numbers (about half the time). When not told the odds, they do even worse. They lose all the money they are given at the beginning of the experiment, and still continue to lose. So what could persuade them to lose over and over again when they have a clear choice for how to make money? The negative expected value gamble usually results in a small win, but every 5 trials a big loss happens, and on average the subjects lose $250 per trial. The reverse happens in the positive expected value gamble - a series of small losses and one big gain. Even thought they lose money, those 4 small gains are so valuable to people that they persist in choosing to play from that deck of cards. It seems to support Nassim Taleb's strategy of investing for catastrophe payouts. I'll explain the psychology underlying this counterintuitive behavior - and the experiment - in detail in my book.

"Inside the Investor's Brain"
That's right - I've got a book coming out as well (wrapping up the first draft today) "Inside the Investor's Brain" to be published by John Wiley & Sons in July 2007. I hope that explains the absence of blog posts :)

Residential Real Estate
I've been getting a lot of calls from reporters about the "real estate bubble" recently, and while prices are high relative to fundamental values, it's not clear to me that low interest rates won't keep back-loaded mortgages and funky ARMs from continuing to sell. Also, rents are rising, putting more fundamental value in properties bought for investment (though nowhere near as much as prices would suggest). Where I live, in Marin County, median and per square-foot prices have continued to rise even as the supply of properties on the market has swelled. Should be an interesting next 2 years. At some point, incomes can't keep up, but I don't know when that'll be (maybe if taxes are hiked on high earners).

Large Cap Value
Money is flooding into U.S. Large Cap Value stocks since the Dow broke its previous record high. Probably will continue for a while. As of last Thursday, Bill Miller (Legg Mason manager extraordinaire) foresees low teens % appreciation in the large cap arena over the next 12 months and up to 20% over 18 months. Considering he beat the S&P500 over the last 15 years in a row (on a calendar basis), his opinion might be a little more prescient than most. Appears there are finally some good values again in the US market (not in energy or commodities, however). If the large cap rally holds for a few weeks, we'll see some good gains in tech and small cap as well (actually, that's already happening).

The May selloff in Asian equities may have put the brakes on those issues for the short term. I'm still very bullish on China, however, in companies with good accounting (not banks). Still some good values in China, and for psychological and political reasons strong growth (hopefully a little slower than current) will hold through the 2008 Beijing Olympics and potentially even through the 2010 Shnghai world expo.